Market and Pro-Forma Analysis

132 Pages·2007·5.86 MB·English

Market and Pro-Forma Analysis
Bay Area Economics
Northeast Corridor Market and Pro-Forma Analysis

Submitted to:
City of Sacramento

Submitted by:
Bay Area Economics

March 2007
Table of Contents
Executive Summary.......................................................................................................................iii
Section I – Market Analysis............................................................................................................1
Introduction.....................................................................................................................................2
Neighborhood Context....................................................................................................................7
Demographic and Employment Trends.........................................................................................15
Existing Real Estate Conditions....................................................................................................28
Neighborhood Retail Sales Leakage/Injection..............................................................................47
Projected Increase in Land Use Demand.......................................................................................51
Market Study Conclusions............................................................................................................56
Section II – Pro-Forma Analysis...................................................................................................64
Comparable Projects in Sacramento..............................................................................................65
Pro-Forma Analysis of Mixed Use Projects..................................................................................72
Results...........................................................................................................................................85
Conclusions...................................................................................................................................88
Funding Opportunities.................................................................................................................106
Pro-Forma Analysis Conclusions................................................................................................108
Appendix A: North Sacramento Census Block Groups.............................................................110
Appendix B: Existing Zoning, Globe Station.............................................................................111
Appendix C: Existing Zoning, Arden/Del Paso Station.............................................................112
Appendix D: Existing Zoning, Royal Oaks Station...................................................................113
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List of Figures and Tables
Figure 1: Northeast Corridor Study Area.......................................................................................5
Figure 2: North Sacramento Study Geography..............................................................................6
Figure 3: Existing Zoning, Northeast Corridor Study Area.........................................................14
Table 1: Population and Household Trends.................................................................................19
Table 2: Age Distribution, 2005...................................................................................................20
Table 3: Household Income Distribution, 2005...........................................................................21
Table 4: Household Size and Tenure, 2000..................................................................................22
Table 5: Housing Stock Characteristics, 2005..............................................................................23
Table 6: Population and Household Projections, 2005 to 2025....................................................24
Table 7: Employment Trends and Projections.............................................................................27
Table 8: Northeast Corridor Area Commercial Real Estate Conditions (February 2006)............31
Table 9: Northeast Corridor Study Area Property Sales, July 2005 – July 2006.........................37
Table 10: Multifamily Project Summary for Northwest Sacramento, 2005 to Present................38
Table 11: Multifamily Residential Rental Market Conditions, Study Area, February 2006........39
Figure 4: Opportunity Sites, Globe Station Area.........................................................................41
Figure 5: Opportunity Sites, Arden/Del Paso Station Area..........................................................42
Figure 6: Opportunity Sites, Royal Oaks Station Area................................................................43
Table 12: Current Development Applications, Study Area..........................................................46
Table 13: Study Area Retail Leakage Analysis, 2005..................................................................50
Table 14: Study Area Projected Increase in Neighborhood-Serving Retail Demand, 2005-202554
Table 15: Study Area Projected Increase in Land Use Demand, 2005-2025...............................55
Table 16: Summary of Station Area Development Opportunities................................................63
Figure 7: Sites for Catalytic TOD Prototypes...............................................................................78
Figure 8: Plan drawing of catalytic site in the Globe Station vicinity..........................................79
Figure 9: Section drawing of the prototype project in the Globe Station vicinity........................80
Figure 10: Plan drawing of catalytic site in the Arden-Del Paso Station vicinity........................81
Figure 11: Section drawing of the prototype project in the Arden-Del Paso Station vicinity......82
Figure 12: Plan drawing of catalytic site in the Royal Oaks Station vicinity...............................83
Figure 13: Section drawing of the prototype project in the Royal Oaks Station vicinity.............84
Table 17: Summary of Development Prototypes and Pro Formas...............................................89
Table 18a: Globe Station Development Prototype and Pro Forma..............................................90
Table 18b: Estimated Development Cost, Globe Station Site.......................................................91
Table 18c: Estimated Operating Income, Globe Station Site........................................................92
Table 18d: Estimated Sale Proceeds, Globe Station Site..............................................................93
Table 18e: Development Assumptions, Globe Station Site..........................................................94
Table 19a: Arden-Del Paso Station Development Prototype and Pro Forma...............................95
Table 19b: Estimated Development Cost, Arden-Del Paso Station Site.......................................96
Table 19c: Estimated Operating Income, Arden-Del Paso Station Site........................................97
Table 19d: Estimated Land Residual Value, Arden-Del Paso Station Site...................................98
Table 19e: Development Assumptions, Arden-Del Paso Station Site...........................................99
Table 20a: Royal Oaks Station Development Prototype and Pro Forma....................................100
Table 20b: Estimated Development Cost, Royal Oaks Station Site............................................101
Table 20c: Estimated Sale Proceeds, Royal Oaks Station Site....................................................102
Table 20d: Development Assumptions, Royal Oaks Station Site...............................................103
Table 21: Development Impact Fees...........................................................................................104
Table 22: Cost Inputs for Pro-Formas.........................................................................................105
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Executive Summary
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This report analyzes the feasibility of transit-oriented development (TOD) in the area surrounding
Sacramento Regional Transit’s (Sacramento RT) Globe, Arden/Del Paso, and Royal Oaks light
rail stations. The report has two sections – Section I is a market study which evaluates the
demand for residential, retail, office and TOD in the area through 2025. Section II is a pro-forma
analysis of three mixed-use, prototype projects which represent the kind of project that the City
might want to encourage to revitalize this area.

Section I – Market Analysis

The analysis defined the “Northeast Corridor Study Area” based on the outline of five U.S.
Census Block Groups, and used this geography to obtain demographic and economic data. The
Study Area is bounded by rail lines to the east and west, State Route 160 to the south, and El
Camino Avenue to the north.

The Study Area is further sub-divided into three station areas, around the Globe, Arden/Del Paso
and Royal Oaks light rail stations, and each station area has a slightly different character.

Despite a significant increase in ridership, overall station usage remains relatively low at all three
light rail stations. Any increase in ridership at the three stations along the Northeast Corridor will
not act by itself as a catalyst for TOD in the station areas. The experience with retail
development around stations in other transit systems has shown that transit patrons alone are not
sufficient in number to support any significant amount of retail. Rather, intensified land uses in
the vicinity of the station geared towards capitalizing on access to light rail will generate
increased transit usage and also provide a market for retail.

Neighborhood Context

The Northeast Corridor Study Area is characterized by a wide array of land uses, including light
industrial centers, residential neighborhoods, commercial corridors and a great deal of under-
utilized land. The majority of the Study Area is part of the North Sacramento Redevelopment
Project Area formed in 1992.1 That same year, the Artist Live Work Ordinance passed, making it
legal for artists to live and work in commercial spaces,2 and arts-related development continues to
occur in the Study Area.

New Faze Development has acquired at least six Del Paso Boulevard properties within the Study
Area and relocated its own office space to Del Paso Boulevard from a suburban location. The
company is planning at least two mixed-use projects in the area.

Much of the retail located within the Study Area consists of local-serving “mom and pop” stores,
while national chains seek locations across Business 80 in the Arden Fair area. However, the
commercial corridors in the Study Area have been undergoing modest but steady transformation.
Formation of a Property-Based Business Improvement District (PBID) along Del Paso Boulevard

1
SHRA North Sacramento Five-Year Implementation Plan
2
www.surrealestates.org and www.sacforart.com
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should support further revitalization.

Redevelopment and New Development

SHRA has recently completed eleven live/work artist units in the Dixieanne Neighborhood, and
also partnered with the Sacramento Mutual Housing Association (SMHA) on the construction of
the 21-unit Victory Townhomes development and the rehabilitation of the 56 apartments at
Evergreen Estates.

SHRA established several housing stock improvement programs within the North Sacramento
Redevelopment Area, such as the Single Family Rehabilitation Loan and Retrofit Grant Program,
the Multifamily Rehabilitation Loan Program and the Boarded and Vacant Program. SHRA also
provides loans and grants for commercial rehabilitation projects. The highly utilized exterior
rebate program provides grants for façade improvements to businesses.

SHRA dedicated over $5 million towards the Del Paso Boulevard Streetscape Master Plan, which
provides street improvements to enhance walkability and attract consumers to shops along the
commercial strip between Arden Way and El Camino Avenue. The project is scheduled to
complete by mid-2007.

New projects approved for the Study Area include a site for a Starbucks and an additional retail
store at the intersection of Rio Linda Boulevard and El Camino Avenue, and 6,000 square feet of
commercial space at 100 Arden Way. Another proposed project at 965 El Camino is a Petrovich
Development Company venture that has been discussed as a potential ground lease to a fast food
establishment, though this plan has been met with considerable opposition. In addition, there are
several commercial rehabilitation proposals that focus on office and professional spaces.

Existing Land Use Conditions

The Study Area consists of residential, commercial and light-industrial land uses, with a
significant number of vacant and under-utilized parcels. Retail and office uses, are located along
the commercial corridors of Del Paso Boulevard, El Camino Avenue to the west of Del Paso
Boulevard, and interspersed along the northern half of Arden Way. These commercial areas have
many vacant and under-utilized sites, particularly along Del Paso Boulevard south of Arden Way.

The northern half of the Study Area, located north of Arden Way, consists of residential lots that
are generally small and interspersed with commercial uses. There are more multifamily
developments in this portion of the Study Area, and the houses and apartment complexes are
generally older, with some in need of rehabilitation. Two currently proposed Signature Properties
residential projects, consisting of 80 single-family detached homes, will improve the diversity of
the housing stock available in this portion of the Study Area. There are a few parks located
within this area. Dixieanne Park contains a lighted baseball field, but is currently fenced off.
Signature Properties has offered to assist in re-planning the park including a playground, a
skateboard park, a picnic area and a green area.3 A “tot lot” at Dixieanne Avenue and Beaumont
Street provides a playground facility for young children. Redwood Park also could offer park

3
McCarthy, Mike. “Transit Village Planned for Swanston Neighborhood.” Sacramento Business Journal.
August 11, 2006.
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facilities and a lighted baseball field to residents in the northwest corner of the Study Area.
However, this park is also fenced off.

The southeast corner of the Study Area contains a large office park. Large, well-maintained
homes on single-family lots characterize the Woodlake Neighborhood in the south. Multifamily
residences in this portion of the Study Area are concentrated close to Del Paso Boulevard, near
the mobile home park bordered by Del Paso Boulevard and State Route 160. Woodlake Park, just
south of the Arden/Del Paso Station, covers more than seven acres of grounds and includes the
Sacramento Police and Sheriff Memorial.

Industrial and commercial uses are dispersed west of Del Paso Boulevard. Large swaths of
vacant or under-utilized industrial land are in the southwest portion of the Study Area.

Demographic and Employment Trends

The study compares demographic and employment conditions in the Study Area with those in
surrounding areas, specifically North Sacramento and Sacramento County.

Regional Trends in Urban Living. Researchers have found that households attracted to urban
infill housing products tend be young singles, childless couples, empty nesters and the elderly.
Like many areas in California, the Sacramento Region will continue to have disproportionate
growth in smaller non-family households and family households without children. SACOG
projects that the Region’s average household size will decrease between 2005 and 2020. SACOG
also anticipates that persons 65 years and older will grow from 11 percent of the Region’s
population in 2000 to 20 percent in 2030.4 As these demographic patterns shift, demand for

compact urban housing types will increase, especially housing near workplaces offering amenities
and character.

Local Demographic Trends. Although the Study Area is largely built out, its population grew
more rapidly than the County overall between 2000 and 2005. Within the Study Area, there are
proportionately fewer family households, smaller household sizes, greater proportions of seniors
65 years of age and older and smaller proportions of children. These demographic characteristics
all suggest solid demand for multifamily housing. Median household incomes in the area are
relatively low, as is the percentage of households owning their own homes. This trend may
change, as households priced out of other more expensive areas of Sacramento seek opportunities
to buy homes that are more affordable. Workforce housing for singles and couples, seniors and
other small households who are attracted to a close-in location within the Sacramento area but
priced out of areas such as Midtown and Downtown is likely to be a strong market niche for the
Study Area. For those households with members who work in the Downtown area, the light rail
stations will provide a convenient and inexpensive commute option.

Employment Trends. Like the population projections, the employment projections for the Study
Area reflect the fact that the Study Area does not have large amounts of properly zoned and

4
Projections of Employment, Population, Households, and Household Incomes in the SACOG Region for
2000 – 2005, Center for Continuing Study of the California Economy, DB Consulting, SACOG, September
2005.
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readily developable land to accommodate increases in employment. Although SACOG expects
significant employment growth in the Manufacturing sector for North Sacramento,
Manufacturing development would not likely contribute to making the Study Area more attractive
for transit-oriented development.

Existing Real Estate Conditions

Most retail stores in the Study Area cater primarily to the everyday shopping needs of the local
community, while more specialized national retailers choose sites on the east side of Business 80
in the Arden Fair Mall area. The tenants targeted to fill the available spaces for rent include
salons, restaurants and local-serving retail stores. High traffic counts along Del Paso Boulevard
are an asset for businesses, nevertheless there are many vacant storefronts.

Local developers are planning a variety of office and mixed-use projects along Del Paso
Boulevard in the near future. There are not many office buildings in the area available for lease,
and brokers claim that office tenants are easy to find. As new office construction increases along
Del Paso Boulevard, the competitive conditions may change. Still, many office users in the area
have been priced out of Downtown Sacramento’s Class A office space and were in search of
more affordable markets near Downtown.

Between July 2005 and July 2006, there were 46 single-family home transactions within the
Study Area, excluding sales in the Woodlake Neighborhood. Generally, the homes in this area
are older, in fair to poor condition, with smaller living areas and fairly large lots. The median
sales price was $268,500 for homes with a median of two bedrooms, 1,082 square feet of living
space, and a 6,534 square foot lot. The SurrealEstates units, subsidized with sweat-equity, sold
between $120,210 and $225,000 for artist live/work units with three bedrooms plus a detached
studio. The market-value of these units is estimated at around $300,000.

Condominium and townhome sales prices in the surrounding area - Natomas, Carmichael,
Sacramento and Fair Oaks - ranged from $146,900 to $419,990 per unit, or $167 to $343 per
square foot of living area. The market for condominiums and townhomes has slowed since the
first quarter of 2006, but smaller for-sale units persist as a key development opportunity within
the Study Area because they offer market-rate ownership housing at an achievable price. A small
unit selling at $150,000 can be purchased by a household earning approximately $45,000 per
year. For comparison, the 2006 median household income in the City of Sacramento is $43,480.5
(In the Study Area, however, it is $28,137, which would qualify for a mortgage of just $89,000.)

While condominium conversions offer the lowest cost housing, it should be noted that a barrier to
conversions in the Study Area and its surroundings is the City of Sacramento’s condominium
conversion ordinance of 1980, which has precluded any conversions to date.

There are three large apartment complexes within the Study Area: the new Victory Townhomes
and refurbished Evergreen Estates, and also Woodlake Close, near Woodlake Elementary. All
three of the complexes are in excellent condition. However, the remaining multifamily units in
the Study Area are limited to small apartment complexes in poor condition.

5
Claritas, October 2006.
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Potential Development Sites

Throughout the Study Area there are vacant land parcels, lots for sale, and under-utilized lots that
present development opportunities. However, many of the vacant sites along the commercial
strips of Del Paso Boulevard, Arden Way, and El Camino Avenue do not show any signs of
development.

Globe Station. There are several vacant, under-utilized, and for-sale parcels along Del Paso
Boulevard within the Globe Station area. As many of these parcels are adjacent to one another,
this area may present an opportunity for parcel assemblage that could enable a large-sized project
to be developed along a major commercial corridor.

Arden/Del Paso. Parking lots and a car dealership along Arden Way represent highly under-
utilized land close to the Arden/Del Paso light rail station. The vacant and under-utilized parcels
along this section of Del Paso Boulevard are more dispersed and, as a result, are more conducive
to smaller infill development efforts.

Royal Oaks. The greatest opportunity site near the Royal Oaks Station is the vacant 3.5 acre
office site on the southeast corner of Royal Oaks Drive and Arden Way. While other smaller
parcels across Arden Way are vacant or under-utilized, this site could leverage the nearby
Lumberjack project and increase the number of employees and potential transit riders to the area
without necessarily requiring a significant amount of new construction.

Planned and Proposed Projects

In general, the planned and proposed projects submitted to the City for review are smaller infill
projects that will have limited impact on the overall supply of available commercial or residential
space. Larger-scale projects are in the early planning process but only a few projects have been
formally submitted to the City.

While there seem to be a number of commercial and mixed-use projects in discussion, not many
formal project proposals or plans have been submitted for approval. One of the projects is
planned on the Sacramento RT-owned Lumberjack site near Royal Oaks Station. A team
comprised of New Faze Development and Fulcrum properties has preliminary plans for 107
residential units over retail at this location. Another New Faze project proposed at 2001 Del Paso
Boulevard consists of approximately 4,250 square feet of retail space, 13,300 square feet of office
space, and 27 condominium units. In addition to these two sites, there are plans for development
throughout the Study Area. Except for the Lumberjack site, most of the developer interest is
centered around Del Paso Boulevard.

Two commercial developments within the Study Area are currently in the planning review
process. One project will be located along El Camino Avenue at Erickson Street, in the northeast
section of the Study Area. This retail site was discussed as a potential ground lease to a fast food
establishment. The second Study Area project is the proposed three-storey office and retail
building at 503 Arden Way, planned by Friedlander of LIMN. This site is already pre-leasing, as
noted in Table 8. Another development site currently seeking a tenant is on Arden Way, just to
the west of Del Paso Boulevard. Currently, there are limited details available for anticipated
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